Gold Climbs From Lowest Close Since 2010 as Goldman Sees Losses

By Joe Richter -
Dec 20, 2013

Gold rose from the lowest close in more than three years to pare a weekly loss that was spurred by the U.S. Federal Reserve’s decision to begin tapering stimulus. Goldman Sachs Group Inc. said that bullion’s decline isn’t over as it heads for the biggest annual drop since 1981.

The metal for delivery in February rose 0.1 percent to $1,195 an ounce by 9:34 a.m. on Comex in New York, bringing the drop this week to 3.2 percent. Futures fell 3.4 percent yesterday to $1,193.60, the lowest settlement since Aug. 3, 2010. The metal will drop to $1,050 by the end of next year, Goldman Sachs said.

Gold is heading for the first annual decline since 2000 after investors lost their faith in precious metals as a store of value. The Fed said on Dec. 18 it will cut monthly asset purchases, known as quantitative easing, to $75 billion from $85 billion. U.S. equities jumped to a record. Exchange-traded products backed by bullion lost about $73 billion in value this year, and mining companies wrote down at least $26 billion.

“Gold is now likely to grind lower throughout 2014,” Jeffrey Currie, Goldman’s head of commodities research in New York, said in a telephone interview. “Much of the expected price decline has been priced in as opposed to a more gentle process as the Fed backs away from QE. When the gold market sees these events, it usually tries to price it in immediately.”

Bullion reached an intraday, 34-month low of $1,179.40 on June 28, less than two weeks after Fed Chairman Ben S. Bernanke concluded a policy meeting by saying bond buying would slow this year and he’d end the program in 2014. Gold rebounded in the next two months partly as the Fed chief said tapering will depend on economic performance, including during testimony to Congress on July 17.

Paulson, Soros

The central bank’s decision this week means traders who were still holding out for a rally are now “throwing in the towel,” Frank Lesh, a trader at FuturePath Trading LLC in Chicago, said in a telephone interview.

Billionaire John Paulson, the largest holder in the SPDR Gold Trust, the biggest ETP, said on Nov. 20 that he personally wouldn’t invest more money into his gold fund because it’s not clear when inflation will quicken. Billionaires George Soros and Daniel Loeb sold their entire investments in the SPDR Gold Trust in the second quarter.

“Money always goes where it’s well treated,” Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees more than $1 trillion, said in an interview. “If you were doing well in equities, you didn’t need to be in gold. As long as the economic data continues to gain traction, we should see the dollar rise and the Fed continue to taper. That’s typically negative for gold.”

Bear Market

“The region below $1,200 is where buying may be seen, especially from the jewelry sector and other industrial users,” said David Lennox, an analyst at Fat Prophets in Sydney. “There’s still a potential for gold to go lower as the market expects further curbs on the QE.”

Gold slumped into a bear market in April and has tumbled 29 percent this year. Some investors sold the metal amid low U.S. inflation and the rally in equities.

Fed officials raised their assessment of the employment outlook, predicting the jobless rate will fall as low as 6.3 percent by the end of next year, compared with a September forecast of 6.4 percent to 6.8 percent.

Projected Inflation

Policy makers may hold interest rates close to zero percent even if unemployment falls below the 6.5 percent rate the central bank had cited as a catalyst for an increase, “especially if projected inflation continues to run below” the 2 percent goal, the Fed said a statement.

Gold rose 70 percent from December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system. Futures have plunged 38 percent from a record $1,923.70 in September 2011.

Hedge funds and other speculators raised their net-long position in Comex gold by 25 percent to 33,449 futures and option contracts in the week ended Dec. 10, government data showed on Dec. 13. Short bets, which slid 6.7 percent to 74,312, are within about 7 percent of the record in July.

Gold will probably reach a bottom by April as the Fed “does whatever it takes” to reach its inflation target, Michael Pento, the president of Pento Portfolio Strategies in Colts Neck, New Jersey, said in a telephone interview.

Global Equities

Global equities have advanced to the highest in almost six years, and U.S. inflation is running at 1.2 percent, almost half the rate of the past decade. Gold ETP holdings slumped 32 percent this year, headed for the first drop since the products started trading in 2003.

Silver for immediate delivery lost as much as 1.3 percent to $19.0044 an ounce, the lowest price since Dec. 4, before trading 0.3 percent higher at $19.30. Platinum rose 0.5 percent to $1,327 an ounce, after trading at $1,316.75 yesterday, the lowest since July 5. Palladium added 0.5 percent at $700.10 an ounce. The metal fell to $694.79 yesterday, the lowest since Oct. 4.